Price Spike Reality: Debunking the Myth of Failed Markets

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The data is in. Market power fails as an explanatory variable for episodes of high prices.

The past summer represented a key turning point in our understanding of deregulated wholesale power markets. Until then, it was possible to find major North American markets that lacked any experience with severe price spikes. Now that immunity is denied. Price spikes in California and other Western markets mean that the last regions bucking the trend have fallen in line.

Moreover, this change tells us something about the nature of price spikes. In fact, the data indicate that "market power" fails as an explanatory variable for the price spike episodes observed so far.

Today, just as we have completed our fifth summer of trading electricity at deregulated wholesale prices, calls for re-regulation are louder than ever. Proponents of re-regulation argue that there is too much market power, prices are too high, there are too many price spikes, and the market cannot work. But after five years of collecting data, it has become apparent that market power does not cause price spikes. Another common view, often espoused by bureaucrats who would defend deregulation, argues that price spikes are rare "abnormalities." That claim, too, is been proved wrong by new price data.

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